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Martek Announces Fourth Quarter and FY 2007 Financial Results

COLUMBIA, Md., Dec 12, 2007 /PRNewswire-FirstCall via COMTEX/ -- Martek Biosciences Corporation (MATK) today announced its financial results for the fourth quarter and fiscal year ended October 31, 2007. Revenues for the fourth quarter were $82.0 million, up 22% from $67.2 million in the fourth quarter of fiscal 2006. During the fourth quarter, the Company recorded a tax benefit of $10.8 million which resulted from the Company's reversal of its deferred tax asset valuation allowance upon the determination that all of its net operating loss carryforwards will be realizable in the future. Net income, including this non-recurring tax benefit was $18.3 million, or $0.55 per diluted share, for the fourth quarter of fiscal 2007 compared with $100,000, or $0.00 per diluted share, in last year's fourth quarter. The fourth quarter of fiscal 2006 included a charge of $4.7 million related to the restructuring of the Company's plant operations.

Excluding the impact of this tax benefit in fiscal 2007 and the effects of the restructuring charge in both fiscal 2006 and fiscal 2007, the Company's net income on a non-GAAP basis would have been $7.5 million, or $0.23 per diluted share, and $3.1 million, or $0.10 per diluted share for the fourth quarters ending October 31, 2007 and 2006, respectively (see "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).

Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Our results in this year's fourth quarter confirm that our strategies are on target and demonstrate the progress we have made against our key focus areas in 2007. During the year, we increased penetration in international infant formula markets, expanded the use of DHA outside of infant formula and improved our gross margin and profitability. We also continued to focus on developing new products to support our future growth. I believe that we are well-positioned to continue growing revenues and profits in the year ahead."

Fourth Quarter and Fiscal 2007 Revenue Summary
Product sales in the fourth quarter increased 24% to $79.0 million and contract manufacturing sales totaled $3.0 million compared with $3.4 million in contract manufacturing sales a year ago. The decline in fourth quarter contract manufacturing revenues resulted from the Company's decision to narrow its contract manufacturing services to include only products with reasonable profit margins or those that the Company expects could have a strategic fit in the future.

Fiscal 2007 product sales increased 14% to $292.5 million and contract manufacturing sales were $14.3 million.

The overall increase in product sales reflects continued strong demand from Martek's U.S. and international infant formula customers, the launch of new and growth of existing food and beverage products containing life'sDHA(TM) and the Company's increased penetration into the pregnancy and nursing and nutritional supplements markets. Compared to the third quarter of fiscal 2007, there was a decline of $600,000 in non-infant formula nutritional revenues as a result of customer ordering patterns associated with new product launches. Martek expects non-infant formula nutritional revenues to be between $6.2 million and $7.6 million in the first quarter of fiscal 2008.
New products launched during the fourth quarter co-branded with the Martek life'sDHA(TM) logo include:
Food and Beverage Products
-- Minute Maid(R) Pomegranate Blueberry Flavored 100% fruit juice blend
with life'sDHA(TM)
-- Beech-Nut(R) DHA Plus with life'sDHA(TM) baby food and cereals
-- British Biologicals' Kids-Pro Nutrition Drink with life'sDHA(TM)
-- Ricos(R) Cheese Sauce with life'sDHA(TM)

Pregnancy and Nursing Products
-- NutraBella's Bellybar(TM) with life'sDHA(TM) (expanded to entire
product line)

Gross Margin and Operating Expenses
The Company's gross margin has improved each quarter of fiscal 2007. Gross margin for the fourth quarter of fiscal 2007 was 40.2%, a sequential improvement over the third quarter gross margin of 38.5%. Gross profit margin continues to improve as a result of DHA productivity gains at Martek's plants and reductions in ARA costs. Gross profit margin in the fourth quarter also included a non-recurring property tax recovery that contributed approximately 1% to gross margin. If not for this non-recurring item, gross profit margin in the fourth quarter would have been approximately 39%. Gross margin for the first quarter of fiscal 2008 is expected to be between 39% and 39.5%.

Research and development expenses in fiscal 2007 were $26.1 million compared to $24.8 million in fiscal 2006, an increase of 5.1%. R&D expenses in the fourth quarter of fiscal 2007 of $6.9 million were essentially unchanged as compared to the fourth quarter of fiscal 2006. The Company's research and development efforts continue to focus on developing new food and beverage applications for life'sDHA(TM), broadening the scientific evidence supporting the benefits of life'sDHA(TM) throughout life, improving manufacturing processes and developing new products to expand the Company's market offerings.

During fiscal 2007, selling, general and administrative expenses increased by $8.6 million, or 20.6%, from $41.6 million in fiscal 2006 to $50.2 million. This increase resulted primarily from additional resources invested in the Company's sales and marketing initiatives designed to grow its sales to infant formula customers overseas and to grow DHA markets outside of infant formula. More specifically, increased expenditures were made to expand the Company's sales, customer support and marketing personnel as well as to broaden the scope of the Company's advertising and public relations campaigns. The increase in SG&A costs over 2006 also included approximately $3.0 million of costs related to the Company's patent portfolio. Martek's intellectual property, and protection thereof, is critical to the Company's commercial success, and as such, the Company continues to invest resources in acquiring, maintaining and defending its intellectual property. The $700,000 sequential increase of SG&A costs over the third quarter of fiscal 2007 also relates primarily to higher patent-related costs.

For the fiscal year ended October 31, 2007, the Company generated $45.9 million of cash from operating activities with the fourth quarter contributing $24.3 million. The $45.9 million represents a nearly 30% increase in operating cash flow as compared to fiscal 2006.

Martek's inventory balance at quarter-end declined as compared to the amount on-hand at the end of fiscal 2006 despite significant revenue growth between years. The Company's significant cash generation allowed for repayments on its credit facility totaling $36 million during fiscal 2007. At the end of the quarter, Martek had $21.6 million in cash and had the entire balance of its long-term revolving credit facility ($135 million) available for future borrowing.

Significant Recent Events

-- Multi-Year Worldwide Sole Source Supply Agreement with Abbott -- In
October 2007, Martek announced that it had entered into a 10-year
supply agreement with Abbott Nutrition, a leading worldwide producer of
infant formula products including the Similac(R) Advance(R) brand,
under which Martek will serve as Abbott's exclusive worldwide DHA and
ARA supplier for all of Abbott's infant formula products. Under terms
of the agreement, Abbott has the right to terminate the arrangement as
of January 2012. Martek has been supplying Abbott with DHA and ARA for
use in infant formula products under a 25-year license agreement signed
in 2000 which remains in effect.

-- New Infant Formula Licensee -- In October 2007, Martek announced that
it had entered into a multi-year license and supply agreement with
Alter Farmacia, S.A. for the inclusion of Martek's arachidonic acid oil
in Alter's infant formula products that contain ARA and are sold in
Spain and Portugal.

-- Worldwide Distributor Agreement for Animal Feed Products -- In
November 2007, Martek announced that it had entered into a worldwide
distributorship agreement for Martek's DHA Gold(R) animal feed product
with Novus International, Inc, an affiliate of Mitsui and Co., Ltd. and
Nippon Soda Co., Ltd. Martek will serve as Novus's sole source
supplier of DHA for all of its poultry and swine feed and enrichment
products. All Novus products containing DHA Gold(R) will display the
DHA Gold(R) trademark. Martek's DHA Gold(R) biomass animal feed
ingredient is a dried, whole-cell algae product used to provide DHA
enrichment for commercially raised animals. Novus International, Inc.
is an industry leader in animal nutrition and health.

-- Settlement of OmegaTech Milestone Litigation -- In October 2007, Martek
announced that it had reached a settlement with the representative of
the former stockholders of OmegaTech in the ongoing litigation
regarding the disputed contingent consideration associated with certain
milestones included in the April 2002 merger agreement. In connection
with the settlement, Martek is issuing 340,946 shares of Martek common
stock to the former stockholders of OmegaTech. As part of the
settlement, the litigation has been dismissed and Martek received a
full release and discharge from any and all future claims by former
stockholders of OmegaTech. The settlement eliminates the potential for
any additional shares to be issued to the former OmegaTech
stockholders. The shares being issued to the former OmegaTech
securities holders resulted in the recognition of approximately $10
million of additional purchase price consideration which has been
recorded as goodwill by Martek.

-- Settlement of Securities Class Action Litigation -- In December 2007,
Martek announced that it had entered into a tentative settlement of all
claims in the securities class action litigation filed in the United
States District Court for the District of Maryland alleging, among
other things, violations of Section 10(b) and 20(a) of the Securities
Exchange Act of 1934. The settlement will result in the dismissal of
the claims against Martek and all other defendants, subject to final
court approval. The proposed settlement of the class action will
include a cash payment to the settlement fund of $6 million, all of
which will be paid by the Company's insurer. The parties anticipate
filing in the near future a motion in the federal court asking for
approval of the proposed settlement, which is required before the
settlement becomes effective and final. No assurances can be given that
the settlement ultimately will be approved by the court.

-- Developments in Patent Infringement Litigation -- There have been
several recent developments in Martek's patent infringement suits in
the U.S. and Germany, a summary of which follow:

-- Martek Wins German DHA Patent Infringement Actions -- In October
2007, Martek received a favorable judgment in its patent
infringement suit against (i) Lonza Ltd., (ii) Celanese Ventures
GmbH and (iii) Nutrinova Nutrition Specialties & Food Ingredients
GmbH. In a separate suit against Lichtwer Pharma GmbH, one of
Nutrinova's customers, a similar judgment was announced. The first
suit involves Lonza's German sale and use of a fatty acid product
currently marketed under the brand name Lonza DHA for use in
functional foods and dietary supplements. The second suit involves
Lichtwer's German sale and use of a DHA-containing oil in a
supplement marketed under the brand name AMEU(R) Alge. The decisions
may be appealed by Lonza and Lichtwer to the higher regional court
in Dusseldorf.

-- Martek Obtains Permanent Injunction Against Lonza in U.S. Patent
Infringement Suit -- In November 2007, a judge in the United States
District Court in Delaware ruled on various post-trial motions and
entered a permanent injunction in Martek's favor against the
defendants in Martek's patent infringement suit against Lonza Ltd.,
Nutrinova Inc. and Nutrinova Nutrition Specialties & Food
Ingredients GmbH. The judge upheld the October 2006 jury verdict
that the defendants infringed all of the asserted claims of two of
Martek's patents and that these patents were valid, and the judge
granted a permanent injunction with respect to these two patents.
Martek expects the defendant will appeal this decision, and the
permanent injunction will be in effect pending any appeal. With
respect to a third patent, the judge reversed the jury verdict;
however, Martek does not believe this will have an adverse effect on
the strength of the permanent injunction and is considering
alternatives regarding this patent. Martek plans to appeal the
judge's ruling on the third patent.

-- European Patent Office Upholds DHA Food Patent -- In November 2007,
the Opposition Division of the European Patent Office (EPO) upheld
one of the Company's European DHA patents. The modified claims of
the patent are narrower than the claims originally granted but
broader than the claims that were previously upheld in a December
2000 Opposition Division hearing. The patent, which expires in
November 2010, relates to fermentation processes, human and animal
food products, pharmaceutical uses of certain claimed microorganisms
and Martek's food DHA production strain. The Company believes that,
on an overall basis, the patent as modified remains an important
part of the Company's intellectual property portfolio and that the
narrowing of the claims of the patent should not have any material
adverse impact on the Company. The Company believes that it is
probable that at least one of the opponents of the patent will
appeal the Opposition Division's decision.

-- New Data Published on Benefits of DHA -- The benefits of DHA
supplementation were recently discussed in several publications:

-- An independent observational study published in the Journal of the
American Medical Association (September 2007) was designed to
determine whether the intake of omega-3 and omega-6 fatty acids is
associated with the development of Type 1 diabetes in children.
This study was conducted with a cohort of 1,770 children known to be
at genetic risk for developing Type 1 diabetes. Results showed that
the omega-3 fatty acid levels were inversely correlated with the
risk for developing diabetes in this group of at-risk children.
These investigators are further investigating this relationship in
an ongoing clinical trial to determine whether DHA, specifically,
has a role in Type 1 diabetes prevention.

-- A report in the Proceedings of the Nutrition Society (August 2007)
in the United Kingdom summarized the current knowledge on maternal
diet and human milk fatty acids. The author reviewed data
demonstrating that maternal intake of DHA during pregnancy and
lactation supports neural system maturation in the infant.

-- Results from the European research project PERILIP were published in
the British Journal of Nutrition (November 2007). As previously
disclosed by the Company, the conclusions of these experts include a
recommendation for pregnant and lactating women to consume at least
200 mg of DHA per day.

Management Outlook
For the first quarter of fiscal 2008, Martek expects total revenues to be between $79 million and $83 million, which include projected non-infant formula nutritional revenue of between $6.2 million and $7.6 million. First quarter gross margin is expected to be between 39% and 39.5%. Net income is projected to be between $6.8 million and $7.5 million, and diluted earnings per share are projected to be between $0.21 and $0.23.

For fiscal 2008, the Company expects growth in both revenues and profitability as compared with fiscal 2007. Martek expects to grow its core infant formula business and expand its penetration into the pregnancy and nursing, nutritional supplements and food and beverage markets. Although the Company expects such growth, Martek is likely to experience quarter-to-quarter fluctuations in both infant formula and non-infant formula nutritional revenues due primarily to variability in customer ordering patterns and the timing of product launches.

Reconciliation of GAAP to Non-GAAP Net Income Measure
The Company makes reference in this release to non-GAAP presentations of net income and earnings per share that exclude the tax benefit from reversal of deferred tax asset valuation allowance and restructuring charge. We are providing this information to assist investors in comparing the results of the current period to those in the prior year periods when the non-recurring items were not present. We caution investors, however, that these non-GAAP results should only be considered in addition to results that are reported under current GAAP and should not be considered as a substitute for results that are presented under GAAP.

Sections of this release contain forward-looking statements concerning, among other things: (1) Martek's expectations regarding future revenue growth in and customer demand from the infant formula, pregnancy and nursing, nutritional supplements and food and beverage markets; (2) its expectations regarding revenues, profitability, cash flows from operations and changes in inventory levels during fiscal 2008; (3) statements regarding specific revenue, gross margin and income expectations for the first quarter of fiscal 2008; (4) statements regarding customer supply arrangements and pricing; (4) expectations regarding the outcome and impact of the various litigation proceedings in which the Company is involved; and (5) its expectations regarding launches by customers of products containing Martek's life'sDHA(TM). Furthermore, Martek's operating results are subject to quarter-to-quarter fluctuations, some of which may be significant. The forward-looking statements noted above are based upon numerous assumptions which Martek cannot control and involve risks and uncertainties that could cause actual results to differ. These statements should be understood in light of the risk factors and cautionary statements set forth herein and in the Company's filings with the Securities and Exchange Commission, including, but not limited to, Part I, Item 1A of the Company's Form 10-K/A for the fiscal year ended October 31, 2006 and other filed reports on Form 10-K, Form 10-Q, Form 10-Q/A and Form 8- K.
About Martek
Martek Biosciences Corporation (MATK) is a leader in the innovation and development of omega-3 DHA products that promote health and wellness through every stage of life. The Company produces life'sDHA(TM), a vegetarian source of the omega-3 fatty acid DHA (docosahexaenoic acid), for use in foods, infant formula and supplements, and life'sARA(TM) (arachidonic acid), an omega-6 fatty acid, for use in infant formula. For more information on Martek Biosciences, visit

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